System to Give Early Alert on Loan Defaults

One of the largest providers of home mortgage money in the country is about to deploy a new high-tech early warning tool designed to keep thousands of borrowers who have fallen behind on loan repayments out of foreclosure.

The Federal Home Loan Mortgage Corp. or Freddie Mac, the congressionally chartered owner of about 7 million home mortgages, has developed an electronic system that spots borrowers who are statistically most likely to end up in foreclosure. Analyzing 70 to 80 “borrower characteristics” from each loan file, the system flags high-risk consumers very early in the default cycle--as little as 16 days after the homeowner misses a mortgage payment.

It also identifies delinquent borrowers who have minimal likelihood of going to foreclosure, even if they’re more than 30 days late on payments. The net result, according to the new program’s designers: Borrowers who really need urgent attention--and possibly a temporary or permanent restructuring of their loan terms--get contacted far earlier than under current industry practices. And borrowers likely to resume timely payments may get no contact at all.

Under current procedures, by contrast, virtually every homeowner who falls behind on a payment gets a standardized phone call, letter or some other communication from their mortgage servicer. Relatively little effort is made to categorize delinquents by risk severity early in the process, and no system attempts to predict delinquency outcomes at the 16-day mark, using behavioral models.

Dubbed “Payment Prospector,” Freddie Mac’s new program will probably be used by many of the country’s largest mortgage lending firms within the coming year, according to officials at the firm. Freddie Mac says it will eventually offer it free, or at nominal cost, to all 2,500 mortgage banks, commercial banks, thrifts and other local lenders with whom it does business across the country.

In an average month, according to Paul T. Peterson, senior vice president of Freddie Mac, borrowers on 170,000 mortgages in Freddie Mac’s portfolio are 30 days late on their payments. The vast majority of these customers bring themselves current within a few weeks.

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But a noteworthy number of each month’s late payers--about 24,000 over the course of a year--get so seriously behind that the company has to resort to the drastic option of either taking over the property and selling it via foreclosure or undertaking some form of “workout,” such as a non-foreclosure “short sale” that disposes of the home quickly for a price below the mortgage amount.

Freddie Mac’s new program is the latest development in an industrywide trend toward reliance on complex mathematical models to predict consumer behavior from the loan application stage onward.

Most large mortgage firms now use electronic credit-risk scores to evaluate borrowers before approving a loan. The Payment Prospector system is intended to give them a similar predictive tool when customers fall behind.

Peterson declined to detail the 70 to 80 loan-file characteristics its proprietary models use, but he said that loan-to-value ratios, property values and prior payment history by borrowers are “significant” early predictors of repayment behavior.

“A lot of people who end up in foreclosure could have avoided it if they had known their options earlier” in the delinquency cycle, Peterson said. “The problem is, once you’re 90 days or more behind, you may not even want to return phone calls” from the lender.

“People think there’s no way out, they’re too embarrassed to even talk about it, and they think someone’s going to yell at them,” he said. But in reality “there are solutions” if borrowers in serious trouble simply open the lines of communication early in the process.

Among the alternatives available to consumers whose loans are owned by Freddie Mac:

* Repayment plans. These are for homeowners who have experienced some sharp, temporary financial blow, like a three-month factory shutdown. Freddie Mac can either allow the missed monthly payments to be repaid in small increments over time or can add the missing principal and interest onto the back end of the loan, extending the term by a few months.

* Loan modifications. When a borrower experiences a longer-term financial problem, say the loss of a second income by a spouse, Freddie Mac sometimes permits a restructuring of the loan itself, maybe a lower interest rate or lower monthly payments. This is reserved, however, for borrowers who can demonstrate a long-term ability to meet the modified payment terms.

* Short sales. These are for owners who want to avoid the prolonged credit agony of foreclosure but whose financial situations aren’t likely to improve enough to pay off the full debt they owe. Freddie Mac agrees to accept less than the full amount owed to it in exchange for a quick sale of the house, thereby getting the loan off the books.

In conjunction with the new program, Freddie Mac has also developed a short video, called “It’s Not Too Late,” that collections staffs can send to borrowers to explain their options if they get in touch quickly.

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Distributed by the Washington Post Writers Group.